I.Budgeting Simplified-Introduction

As ,we near the next fiscal year, managements of each organisation are busy in the process of evaluating how well their business is moving ahead and what steps need to be taken to gain the extra edge in the prevailing competitive market. A tool used for this is budgets. Most staffs/employees don’t have a clear cut idea on what budgeting is all about. It is sometimes presumed as a restriction. So what should we understand about budgeting?A small summary is provided to have an idea on what’s the process is all about.

A budget is a realistic plan for the future expressed in quantitative terms. This is a planning tool, control tool, a communication tool and motivational tool.

It helps to anticipate problems before they occur, and helps management to evaluate assumptions and objectives identified in the budgeting process. It is also used as a self-evaluation tool and comparison is made to determine where organisational performance is meeting, lagging or exceeding expectations

Time frames for Budgets

Each organisation can have its own budget with appropriate time frame

1) Strategic plans and Budgets-have time frames of up to 10 years

2) Intermediate plans and Budgets-have time frames of up to 2 years

3) Operational plans and budgets-have time frames of up to 1 year.

Points to be noted when preparing budgets

1) To serve effectively as a control function, it must be integrated with accounting system and organisational structure. This helps in assigning and setting variances to proper units.

2) Budgetary slack to be avoided-underestimating revenues or over estimating expenses to be avoided to have its desired effects

3) A static budget is for one level of activity whereas a flexible budget is a plan for varying level of activity. Static budget are those budgets that remain unchanged throughout the year for comparison with actual results.

4) Difference between actual performance and budgeted amount is called a “variance”.

5) Sufficient “lead time” is required to finalise it before the fiscal year begins.

6) A “Budget planning calendar” is the schedule of activities for the development and adoption of budget. It includes list of dates indicating when specific information/data is to be provided by others by each departments/branches.

7) Usually based on a years’ time span and months, quarters of that year considered as an artificial time horizon. Innovations and rapid responses should not be limited by an artificial deadline imposed by the budget.

Best Practice Guidelines

1) Automating the process in order to concentrate more on analysing and implementing changes instead of spending time manually creating a budget.

2) Setting realistic goals and obtaining assistance from all levels of personnel to help gain support from staff/employees.

3) Considering “What if” scenarios,

4) Updating budgets regularly to reflect current conditions and

5) Using an repetitive budgeting process that reflects changes suggested by operations team and management.

6) Many companies are reluctant to change budgets. Even the best budget needs to be changed occasionally to respond to changes in the organisations changing environment.

......to be continued.